Deflation Spreads Thoughout Asia
Excess capacity increases
SINGAPORE - When East Asia's financial crisis began in July 1997, officials and economists worried that it would cause runaway inflation. Now, they are more concerned about the specter of deepening deflation.
Persistent price decreases in Japan, China, South Korea, Taiwan, Hong Kong and Singapore, triggered by too much capacity and too little demand, are depressing manufacturing production and profits.
If deflation intensifies or spreads to other countries in the western Pacific, officials fear it will worsen unemployment and recession in the region.
''A major constraint to an early recovery, not yet adequately quantified, is the extent of overcapacity in the region, particularly in the property and industrial sectors,'' Foreign Minister Alexander Downer of Australia warned recently. ''The closure of factories and the loss of jobs as a result of the crisis will make it all the more difficult for economies to grow again quickly.''
Unfinished or unoccupied office blocks, apartment buildings and hotels in East Asian cities are an obvious legacy of the boom that went bust. Less obvious is the slump in demand that is forcing factories to close or lay off workers across the region.
Many banks are unable or unwilling to lend to companies in East Asia because of perceived risks. Analysts said a deflationary spiral would make them even more reluctant to lend.
''Deflationary trends will exacerbate the banking-sector credit crunch, as banks are reluctant to lend in an environment of falling nominal returns,'' said Kate O'Donoghue, an associate director in the Singapore office of Barclays Capital, a unit of Barclays Bank. ''This will undermine already weak private consumption and investment.''
If banks won't extend new credits or roll over existing loans, more cash-starved borrowers and companies will have to sell assets to pay off debts.
''Deflation translates into higher real debt burdens, leading to low demand and an economic contraction, as we have seen in Japan from 1991 onward,'' said Ajay Kapur, an executive director at Morgan Stanley Dean Witter & Co. in Hong Kong. ''Corporate profits decline substantially, and the weakened banking system is a drag on the economy.''
In Japan, producer prices fell 4.4 percent in 1998, and the slide is intensifying; in the three months to December, they plunged 10.8 percent. Japanese consumer prices are projected to fall 0.6 percent this year.
''Clearly, the most likely place for a deflation downdraft to gain momentum is Japan,'' said Ian Harper, professorial fellow at Melbourne University's business school. ''Given the size and importance of the Japanese economy, the possibility of worldwide deflation led by Japan is undeniable and worrying.''
Japan is the second-largest economy in the world, after the United States, and accounts for two-thirds of Asia's output of goods and services.
In China, where industry is plagued by stockpiles of unsold goods, retail prices have dropped for the past 14 months.
In Taiwan, East Asia's best-performing economy after China, producer prices fell 10 percent in January, and core consumer prices dropped 1 percent.
''The Taiwan economy is flirting with deflation,'' said Guonan Ma, head of Asia-Pacific economic research in the Hong Kong office of the securities firm Salomon Smith Barney Inc.
''Tightening financial conditions, continued sluggish domestic demand and stronger overseas deflationary forces from China, Japan and Latin America could be the main contributing factors.''
South Korea's producer price index dropped 4.3 percent in February, against a 15.3 percent rise in the same month last year, while consumer prices rose just 0.2 percent, against a 9.5 percent rise in February 1998.
''Korea will experience price deflation for a number of months,'' said Rob Subramaniam, an economist in the Seoul office of Lehman Brothers. ''It's a reflection of the substantial amount of excess capacity, lack of demand and the strong Korean won, which makes imports cheaper.''
Consumer prices in Hong Kong are expected to decline 2.8 percent this year; in Singapore they will probably fall 0.5 percent, say forecasts by J.P. Morgan & Co., the U.S. investment bank.
Other economists expect consumer prices in Singapore to drop as much as 1 percent in 1999, the second successive year of deflation. The official consumer price index declined 0.3 percent in 1998, crimping profits as companies were unable to raise prices.
For some countries in East Asia, such as Indonesia and Thailand, the fall in inflation is welcome. For others, modest deflation may be tolerable.
Price declines represent real income gains for consumers, said Vicky Wong, an economist in the Hong Kong office of J.P. Morgan. But she cautioned that any spending increase was liable to be outweighed by deteriorating business profits, rising job insecurity and depressed consumer sentiment.
Some of the developing downward pressure on prices in East Asia is benign because it reflects technological advances and deregulation, said Russell Jones, an economist in the Tokyo office of Lehman Brothers.
''But the bulk is malign and a function of demand deficiency,'' he added. ''Anemic demand, business and consumer pessimism, and financial stress could feed off each other and encourage much steeper declines in the price level.''
International Herald Tribune, March 11, 1999 |
